Our event today is the penultimate leg of what we call our “Voyage to Indonesia”—the final leg being our Annual Meetings to be
held next week in Bali.

This is a challenging moment for Indonesia, a country that has transformed
itself in recent decades, unleashing its economic dynamism and harnessing
the incredible ingenuity and diversity of its people. A country that is so
often dealing with the hardship of natural disasters.

We can all learn so much from Indonesia and its ASEAN partners—especially
when it comes to building resilience, embracing openness, and reaching out
across borders.

One important lesson is that if countries work together, they are far more
likely to enhance the well-being of their people than if they go it alone.

We saw this clearly during the global financial crisis.

This multilateral spirit is captured well by a beautiful Indonesian
phrase—“gotong royong,” “ working together to achieve a common goal.”

This spirit is needed more than ever to meet the challenges ahead.

This morning, I will talk about three of them: (i) building a better trade
system; (ii) guarding against fiscal and financial turbulence; and (iii)
rebuilding trust in policymaking and institutions.

Trade, turbulence, and trust
.

1. Changing Economic Weather

Before I get to the challenges, let me present a brief “lay of the land” on
the eve of our Annual Meetings.

First, the good news. Global growth is still at its highest level since
2011 when economies were rebounding post-crisis. Unemployment is still
falling in most countries. And the proportion of the global population
living in extreme poverty has dropped to a new record-low of
less than 10 percent.
[1]

In other words, the world continues to experience an expansion that holds
the promise of higher incomes and living standards.

So is everything fine? Well, only up to a point.

For most countries, it has become more difficult to deliver on the promise
of greater prosperity, because the global economic weather is beginning to change. What do I
mean by that?

A year ago, I said, “the sun is shining—fix the roof.” Six months ago, I
pointed to clouds of risk on the horizon.

Today, some of those risks have begun to materialize.

Indeed, there are signs that global growth has plateaued. It is becoming
less synchronized, with fewer countries participating in the expansion.

In July, we projected 3.9 percent global growth for
2018 and 2019. The outlook has since become less bright, as you will
see from our updated forecast next week.

A key issue is that rhetoric is morphing into a new reality of actual trade barriers. This is hurting not only trade itself, but
also investment and manufacturing as uncertainty continues to rise.

For now, the United States is growing strongly, supported by a procyclical
fiscal expansion and still easy financial conditions—which can become a
risk in a maturing business cycle.

In other advanced economies, however, there are signs of slowing,
especially in the euro area and, to some extent, in Japan.

Emerging Asia continues to grow at higher rates than other regions, but we
see indicators of moderation in China, which will be exacerbated by the
trade disputes.

Meanwhile, challenges have been mounting in a number of other emerging
market and low-income countries—including in Latin America, the Middle
East, and Sub-Saharan Africa.

Many of these economies are facing pressures from a stronger U.S. dollar
and a tightening of financial market conditions. Some of them are now
facing capital outflows.

To be clear, we are not seeing broader financial contagion—so far—but we
also know that conditions can change rapidly.

If the current trade disputes were to escalate further, they could deliver
a shock to a broader range of emerging and developing economies.

So what should be done?

At times like these, policymakers might take inspiration from the great
American poet, Oliver Wendell Holmes Sr., who once said:

“To reach a port, we must sail sometimes with the wind and sometimes
against it—but we must sail, and not drift, nor lie at anchor.”

As I have said, “We should fix the roof”—now more than ever it is the right thing to do.

How can that be done in practice? By addressing the three challenges I
mentioned at the outset—trade, turbulence, and trust.

a) Build a Better Global Trade System

First, trade. Simply put, countries need to work together to build a global
trade system that is stronger, fairer, and fit for the future.

The stakes are high because the fracturing of global value chains could
have a devastating effect on many countries, including advanced economies.
It could also prevent emerging and low-income countries from reaching their
full potential.

The stakes are high because import restrictions prevent trade from playing
its essential role in boosting productivity, spreading new technologies,
and reducing poverty.

That is why we need to work together to de-escalate and resolve the current trade disputes.

History shows that, while it is tempting to sail alone, countries must
resist the siren call of self-sufficiency—because as the Greek legends tell
us, that leads to shipwreck.

Going forward, what we need are“smarter rules” for trade that ensure all can gain. We need to fix the system, not destroy it.

The immediate challenge is to strengthen the rules. This
includes looking at the distortionary effects of state subsidies,
preventing abuses of dominant positions, and improving the enforcement of
intellectual property rights.

On these issues, we can be encouraged by the growing number of discussions andproposals, most
recently from Canada and the European Union. These are positive steps,
and there is further work to be done.

For example, if agreement among all countries cannot be achieved,
governments could use more flexible trade deals—where
like-minded countries agree to work within the framework of the World Trade
Organization.

Of course, fixing the system also means making it fit for the future. Here again, we could use flexible
trade agreements to unlock the full potential of e-commerce and other
tradeable services, such as engineering, communications, and
transportation.

Our latest analysis
[2]
shows that by reducing trading costs for services by 15 percent, we could boost total GDP of G20 countries by
more than $350 billion this year. That would be the
equivalent of adding another South Africa to the G20.

These are the kinds of gains that are within reach—if we work together, if
we focus on creating a better global trade system. There is a clear
appetite to improve and expand trade. The recent African trade agreement,
and the flurry of bilateral negotiations evidence that determination.

b) Guarding Against Fiscal and Financial Turbulence

My second challenge is guarding against fiscal and financial turbulence.

Here’s the question: ten years after the global financial crisis, are we
any safer? My answer is “Yes”…but not safe enough. We must push on with the
financial regulatory agenda—and resist backsliding.

Moreover, after a decade of relatively easy financial conditions, debt
levels have reached new highs in advanced, emerging, and low-income
countries.

In fact, global debt—both public and private—has reached anall-time high of $182 trillion—almost 60 percent higher than in 2007.

This buildup has left governments and companies more vulnerable to a tightening of financial conditions.

Emerging and developing economies are already feeling the pinch as they
adjust to monetary normalization in the advanced world.

That process could become even more challenging if it were to accelerate
suddenly. It could lead to market corrections, sharp exchange rate
movements, and further weakening of capital flows.

We estimate
[3]
that emerging economies—excluding China—could potentially face debt
portfolio outflows of up to $100 billion—which would
broadly match outflows during the global financial crisis.

This should serve as a wake-up call.

We are not there yet, by any means. But some countries are already facing
rough waters. The IMF is deeply engaged in these economies through analysis
and advice, and by providing financial assistance where needed. We will
continue to do so.

For most countries, however, steering the boat means creating more room to
act when the next downturn inevitably comes.

Emerging economies
can create this room by reducing risks from high corporate debt, while
greater efforts are needed to make government borrowing
[4]
more sustainable in low-income countries.

In many cases, creating more room means allowing flexible exchange rates to
absorb some of the pressures from capital flow reversals.

On that point, IMF analysis
[5]
shows that countries with greaterexchange rate flexibility experienced smaller
output losses after the global financial crisis. We also found that
economies are more resilient when their monetary policy is
more trusted and when their independent central banks communicate clearly.
[6]

Advanced economies
need to act as well. They can create the room they need by reducing
government deficits and placing public debt on a gradual downward path.
This should be done in a fair and growth-friendly way—through more
efficient spending and by ensuring that the burden of adjustment is shared
by all.

At the same time, countries should not overlook another aspect of their
balance sheets—the public wealth that is tied up in government financial
assets, public companies, and natural resources.

Here we have new IMF analysis
[7]
of 31 countries showing total public assets of more than $100 trillion, well over twice their GDP.

Improving the management of these public assets could
deliver additional revenues of about 3 percent of GDP per
year—which is significant. In fact, that is equal to what advanced
economies collect in corporate tax in a year.

Again, it’s not about sailing alone, with each country responding only to
national concerns. Guarding against potential turbulence will require
countries working together in a cohesive and collaborative manner.

As an example of this, we know that governments can make their
economies less vulnerableto disruptivecapital flows
by reducing current account imbalances
. How? By increasing public investment where fiscal positions are
healthy and by lowering fiscal deficits elsewhere. These policy
actions at the national level complement each other at the global level.

Guarding against turbulence also requires a strong global financial safety
net, which in turn means a well-equipped and well-resourced IMF at its
center. This is key to ensure that the Fund can play its unique role in
helping countries deal with future crises.

This is a top priority for me—combined with further adjustment to the
governance of the Fund to better reflect the changing economic dynamics of
our membership.

c) Rebuild Trust in Institutions and Policymaking

Let me now turn to my third challenge—rebuilding trust in
institutions and policymaking. This is essential for durable and more
widely shared growth.

The causes of the decline in trust are many. First and foremost, far too many people remain on the margins.

In too many countries, growth has failed to lift the prospects and
livelihoods of ordinary people. In too many cases, workers and families are
now convinced that the system is somehow rigged, that the odds are stacked
against them.

This is not hard to understand: since 1980, the top one percent globally
has captured twice as much of the gains from growth as the bottom 50
percent.

Over that period, many advanced economies saw rising income inequality and
limited growth in wages—partly due to technology, partly due to global
integration, and partly due to policies that favored capital over labor.

A related source of dissatisfaction comes from raw memories of the global
financial crisis. Many people saw this as the ultimate breach of public
trust—because of the widely-shared perception that those who caused the
crisis did not face consequences, while ordinary people paid a heavy price.

A third factor is corruption—an economic and social plague
that makes it hard for countries to take the right collective decisions.
This is bound to inhibit economic dynamism, which further undermines trust
and sets in motion a vicious cycle.

And, of course, in an age of rapid technological change—where
digitalization and artificial intelligence are sweeping across
industries—we will need even higher levels of public trust.

There are various estimates of how many jobs may be gained or lost due to
technology. A striking finding from our recent analysis indicates that
women could be especially hard hit—with 26 million of their jobs at risk in OECD countries alone.

Why? Because women often have to do more of the routine tasks than
men—precisely the kinds of jobs more likely to be affected by
automation.

That is why governments will need to take more responsibility for
the human cost of disruption, whether from technology, trade, or economic
reform.

So what can be done?
A key priority must be to invest in people—in health and education, in
social protection systems.

These improvements in human, social, and physical capital are
especially important in low-income countries, where significant new
spending is needed to achieve the Sustainable Development Goals. We have recently estimated that this additional spending amounts to about $520 billion per year by 2030.
[8]

We certainly need a 21st-century education system—to reduce
inequality of opportunity and help everyone thrive in the digital age.

We need scaled-up investment in training and social safety nets—so that
workers can upgrade their skills, transition to higher-quality jobs, and
earn more.

Wherever feasible, we need more progressive taxation and higher minimum
wages. And across the globe, we need smarter taxation of multinational
corporations to ensure that all pay their fair share.
[9]

Fairer policies should also make it easier to balance work and family,
where burdens too often fall on women: these policies range from
well-designed parental leave, to affordable high-quality childcare, to tax systems that do not penalize second
earners.

Another element critical to restoring trust is to implement policies
and reforms that not only boost growth, but do so in a manner that is
inclusive and sustainable.

This means that all countries must join hands to tame the menace of climate change. If we care about the well-being
of future generations; if we care about the plight of climate refugees, we must be serious about pricing carbon
emissions to account for their social costs.

The IMF is supporting its members on this and many other
pressing issues through policy advice and capacity development, and by
providing a platform for sharing best practices and fresh ideas.

This includes helping our members navigate the rapidly shifting currents of
the fintech world.

Together with the World Bank and other partners, we have developed what we
call the “Bali Fintech Agenda,” to be released at our
Annual Meetings next week. This is a blueprint for policymakers who are
seeking to manage new risks, while harnessing fintech potential for the
benefit of all—not just the wealthy or the well-connected.

This is another example of how we can foster international cooperation
that is
more inclusive, more open and representative, and more effective in
delivering for people.

I call this the “new multilateralism.” And I believe we
need it more than ever to address the challenges of trade, turbulence, and trust.

Conclusion

Let me conclude by thanking the Executive Board of the Fund and our
talented and diverse staff, who embody the highest aspirations of
international cooperation.

This is, in my view, beautifully captured in the official motto of
Indonesia: “Bhinneka Tunggal Ika,” “Unity in Diversity.”

When we sail together, we are stronger, nimbler, better able to steer the
ship through rough waters and avoid the rocks of shipwreck.

So now, as we set sail on our Voyage to Indonesia, let us work
together—so we can steer our economies in the right direction and bring all people whether on big or small boats to a new and better port.

Thank you.

[1]
New World Bank analysis shows that extreme poverty dropped to 10
percent in 2015, the latest year for comprehensive data, and the
Bank estimates that the decline has continued over the past three
years.